Investors love buying dividend stocks, and Wealthy Retirement readers are no exception. In fact, dividend investing is our most popular subject.
Companies know that investors love dividends too – so it’s not surprising that about 42% of our readers surveyed said that the primary reason companies start paying a dividend is to attract long-term investors.
They’re not wrong. Our research has found that investor demand for payouts leads to dividend initiations. That’s why dozens of companies initiate their first dividends every year.
While dividends may start off small, investors can quickly capture profits of 1,000% or more by anticipating this one-time event.
Teen retailer American Eagle Outfitters (NYSE: AEO) is one of many examples. The company declared its very first dividend on September 1, 2004. Over the next nine months, an options play rose by 1,067%.
Luxury sports car maker Ferrari (NYSE: RACE) was another big winner. An options play soared 4,891% in just 16 months after its dividend initiation on February 16, 2017.
Investors who owned the option before Ferrari’s dividend announcement could’ve turned $1,000 into $50,000!
The key to capturing these life-changing profits is buying the stock or option before the company declares its first dividend.
To predict dividend initiations, you have to know what to look for.
In a recent survey, 54% of our readers said that growing cash reserves on the balance sheet signal that a company will initiate a dividend. Another 35% of readers surveyed stated that rising free cash flow is an indication that a dividend initiation is imminent.
They’re not wrong.
Wealthy Retirement’s Chief Income Strategist Marc Lichtenfeld has identified three signs that indicate when a company is about to initiate a dividend. The first two signals, unsurprisingly, are related to cash flow.
- The first sign is positive free cash flow. A company must be generating positive cash flow before it can begin paying a dividend.
- The second sign is growing free cash flow. A company with rapidly growing cash flow can easily pay down debt, buy back stock, invest in growing its business and pay its shareholders.
- The third is investor demand. If a company’s investors want a dividend, a company is more likely to pay one.
A dividend initiation is a one-time-only moment in a company’s lifespan, and it can help investors profit handsomely. By recognizing the signals, you can get in before the announcement to capture the income and the gains.